The Reserve Bank of India, or RBI, has hiked CRR by 50 bps to 8% in two stages to contain inflation expectations, reports CNBC-TV18. The first 25 bps CRR hike will be effective April 26 while the second 25 bps hike will be effective May 10. The 50 bps hike would drain Rs 18,500 crore from the system.

Meanwhile, RBI plans to sell Rs 2,500 crore 91-day treasury bills Wednesday, inclusive of Rs 2,000 crore under the market stabilization scheme, or MSS. The central bank also plans to sell Rs 2,000 cr 364-day T-Bill Wednesday, inclusive of Rs 1,000 crore MSS.

By Latha Venkatesh

The cash reserve ratio is basically the ideal cash that the banks had to set apart from their total deposits. Until now the banks had to set aside 7.5% of their total deposits as ideal in cash they cannot lend it. Now they have to start setting aside 8% and it will come into effect in two stages. On April 26, it gets raised to 7.75%. On May 10 the CRR will effectively become 8%. The net impact quite clearly is to remove the amount of cash in the system if less money is in the system, the implication is that interest rates will go up because there is less money to lend and that will probably rein in inflation.

Clearly, it is an inflation control measure and there are no secrets to that the Reserve Bank of India and the Government of India have repeatedly being making statements that inflation is at a level that is completely beyond its tolerance limit. In fact speaking in New York yesterday, the Reserve Bank governor had indicated that the inflation level has gone beyond tolerance level and there was something that was available in his speech that indicated that what the RBI might do something more stronger than what the market has expected.

Perhaps today's hike was not expected because the Credit Policy announcement was expected on April 29. But looks like the RBI have chosen, after looking at today’s inflation figures, not to wait until April 29.